Effect of drop shipping and entry through multiple ports on appraisement

HQ W546156 January 10, 1997 VAL RR:IT:VA W546156 LPF CATEGORY: Valuation Timothy C. Stanceu, Esq. Hogan & Hartson L.L.P. 555 13th Street NW Washington, D.C. 20004-1109 RE: Effect of drop shipping and entry through multiple ports on appraisement Dear Mr. Stanceu: This is in response to your October 6, 1995 request for a ruling concerning the appraisement of [******] ("merchandise" or "goods"). We have granted confidential treatment to the information designated in your June 7, 1996 submission and accordingly have excised, in the public version of this decision, the bracketed information. We regret the delay in reply. FACTS: [******] ("U.S. Company") is a U.S. manufacturer, importer and distributor of the subject merchandise. The U.S. Company purchases the finished goods from [******] ("Foreign Seller") for sale and distribution in the U.S. Most of the merchandise is assembled in a third country by [******] ("Foreign Producer") who is a subsidiary of the Foreign Seller. Although the Foreign Producer assembles the merchandise using components sold to it and consigned to it by the Foreign Seller, some of the components are manufactured by the U.S. Company or produced in other countries. The remainder of the goods are purchased by the Foreign Producer from other foreign vendors and further processed by the Foreign Producer for sale to the U.S. Company. You explain that the U.S. Company will design and engineer the merchandise, conduct all marketing, sale and distribution activities for the merchandise in the U.S., and negotiate all the terms of the contracts for the resale of the goods to U.S. customers. Further, you provide it will be the importer of record for the merchandise and title and risk of loss will pass from the Foreign Seller to the U.S. Company after exportation of the goods from the country of production and before importation into the U.S. In distributing the merchandise in the U.S., the U.S. Company will arrange for "drop shipping" directly from the port of entry, rather than from a centralized distribution facility. At the direction of the U.S. Company, the Foreign Producer will prepare prepackaged shipments of the merchandise for transport to the U.S. Company's customers. Under the U.S. Company's control, these pre-packaged shipments will be handled by freight forwarders for ultimate delivery to the U.S. Company's customers. You state that the U.S. Company, Foreign Seller and Foreign Producer are related parties pursuant to section 402(g)(l) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. 140la. The prices at which the merchandise will be purchased by the U.S. Company from the Foreign Seller will be established by the U.S. Company and Foreign Seller. However, you submit that the U.S. Company is unable to ensure that the transaction is conducted at arm's length. The prices, you explain, are subject to fluctuation and retroactive price adjustments not based on any pre-established formula which would allow them to be ascertained at, or shortly after, the time of entry. You provide that historically the goods assembled by the Foreign Producer have been imported by the U.S. Company and appraised under computed value, pursuant to section 402(e) of the TAA. This, you explain, is because the U.S. Company has been unable to demonstrate that the price between the Foreign Seller and U.S. Company has not been influenced by the relationship between the parties. No documentation has been presented in support of these claims. You submit that the instant transactions only differ from previous importations in two respects. First, you state that in the instant transactions the goods will be drop shipped from the port of entry rather than from a centralized distribution facility where they are stored for subsequent distribution. Second, the U.S. Company intends to import the merchandise through various U.S. ports of entry as opposed to importing virtually all the goods through the port of New York. ISSUE: Assuming computed value is the appropriate method of appraisement, whether drop shipping merchandise directly from the port of entry or importing through various ports of entry effects the computed value of the instant merchandise. LAW AND ANALYSIS: The preferred method of appraising merchandise imported into the United States is transaction value pursuant to section 402(b) of the TAA Section 402(bX1) of the TAA provides, in pertinent part, that the transaction value of imported merchandise is the "price actually paid or payable for the merchandise when sold for exportation to the United States" plus amounts for the enumerated statutory additions (emphasis added). Accordingly, a bona fide sale must exist if transaction value is to serve as the appropriate method of appraisement. However, regardless of this determination, we still recognize that the subject merchandise is appraised under transaction value only if the buyer and seller are not related or if related pursuant to section 402(g)(1), as is the case between the U.S. Company and Foreign Seller, the transaction value is deemed to be acceptable in accordance with section 402(b)(2)(B). If a bona fide sale was not found to exist between the parties or the transaction value between the related parties was not found acceptable, it would be appropriate to proceed sequentially through the subsequent provisions of section 402 of the TAA Insofar as transaction value of identical or similar merchandise in accordance with section 402(c) is not available, it would be appropriate to proceed to computed value, section 402(e). We do not possess the necessary documentation and evidence to verify whether computed value as opposed to transaction value is, in fact, the appropriate method of appraisement. Assuming computed value initially was the appropriate basis of appraisement and currently is utilized, it would remain the importer of record's responsibility, using reasonable care, to file the declared value and other documentation or information necessary to enable Customs, among other things, to assess duties on the merchandise. 19 U.S.C. 1484. Accordingly, it would be appropriate for Customs to request verification of the importer's calculation of its computed value, in accordance with a Cost Submission (Customs Form 247) and to review the importer's submissions concerning the producer's costs of production, profit, and general expenses, as well as any assists provided by the buyer of the imported merchandise. At this time, we note that no such documentation has been submitted for our review. Assuming all other facts pertaining to the transactions remain the same, drop shipping merchandise directly from the port of entry or importing through various ports of entry will not effect Customs' assessment of the factors discussed above and, hence, appraisement of the instant merchandise. HOLDING: Based on the evidence presented, we cannot verify the appropriate method of appraisement. However, assuming computed value is the appropriate method of appraisement and all other facts pertaining to the transactions remain the same, drop shipping merchandise directly from the port of entry or importing through various ports of entry will not effect the computed value of the instant merchandise. Sincerely, Thomas L. Lobred, Acting Director International Trade Compliance Division